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How Fixed Exchange Rate is Important for a Country?

  • September 2014
  • Posted By Ninoslav

In this currency market, you need some information before you start trading. It will be helpful to you as an individual trader to get a good stability in the currency market. You should also know if there is any fixed rate for your country’s currency. What is a Fixed Exchange Rate? It is very important to know if you are trading from a small country.

Why exchange rate needs to be fixed?
An Exchange rate is volatile. Trader trades for different currency pairs. But, some small countries want to give importance to their local currencies. Thus, they fixed the rate of a currency against another single currency.

How it is beneficial for an individual country?
A Fixed Exchange Rate is completely beneficial to control the inflation. As a result, it is easier to maintain investments between the two currencies. It is also more predictable for traders. It is helpful to provide macroeconomic stability by preventing the Government from using monetary policy which is domestic.

How the rates are decided?
A country’s government decides a currency rate. But do you know how? The government decides the rate on the basis of some fixed amount of gold, or some amount of another currency. But, one important thing is an open market mechanism is used. It means traders can easily buy and sell at fixed rate any time.

Government needs to maintain the rate by trading in a perfect way. It reserves foreign currencies. If the currency rate falls from the assumption rate then it sells its own currency and similarly if the rates go higher than their assumption rate then it buys its own currency using its reserves.

The complete knowledge of Fixed Exchange Rate is beneficial to every trader. You will also get the knowledge of “How Exchange Rate is important to the traders?


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